The federal Environmental Protection Agency threatened Friday, for the first time in its history, to bar a construction company from working on lucrative agency projects if the company fails to adhere to a comprehensive worker safety program.

The EPA action evolved out of serious safety problems on the $3.7-billion Deep Tunnel project in the Chicago area. Ten people have died working on the 131-mile sewage treatment project during its 12-year history. Years behind schedule, the tunnel project is now supposed to be completed sometime after the year 2000.

Five of the deaths have involved employees of Kenny Construction Co., based in Wheeling, Ill., and its partners on the project. The company faces civil charges by the federal Occupational Safety and Health Administration (OSHA), and criminal charges filed by the U.S. Attorney in Chicago.

Foreman Dies in Shaft

The criminal case, filed in November, resulted from the April 24, 1985, asphyxiation death of a foreman, J.T. Smith, in a shaft that had not been tested for gas. It was only the second criminal action involving a workplace safety violation filed by the Justice Department during the Reagan Administration. Kenny faces up to a $500,000 fine in that case.

On Friday, the EPA, after an extensive review, said that it had entered into a settlement agreement with Kenny Construction that requires the company to engage in a series of safety practices or face debarment.

The company must provide safety training for all personnel working in tunnels or shafts, conduct air tests for combustible gases and air contaminants, "allow significantly increased and unencumbered inspections" by OSHA and make detailed reports to the agency every month on all of its workplace fatalities, injuries and illnesses.

"We were prepared to initiate suspension and debarment proceedings against Kenny because of safety violations" on the Deep Tunnel project, said Valdas V. Adamkus, the regional administrator for EPA in Chicago. He said the agency had decided to settle instead "to immediately assure the safety of construction workers on all of Kenny's EPA projects," a reference to the fact that Kenny would have waged a court battle to fight a debarment action that could have lasted several years.

Says Action Sets Precedent

"What is precedent-setting about this action is that it elevates safety issues to the same level as other issues we would be concerned about for debarment or suspension," said John Grand, EPA's director of public affairs in Chicago. He said that normally companies are debarred or suspended from participating in agency-financed construction projects when they have been discovered to have misused federal funds or engaged in other criminal acts.

"This is a signal that says safety issues are equally important," said Grand.

Grand acknowledged that the settlement did not deal with Kenny's past violations and said he anticipated that would lead to criticism. But he said: "Our feeling is that because there are both civil and criminal actions going against the company for past violations, those clubs are already poised. Our concern has been what can we do right now to ensure the safety of workers. It's the first time we've ever forced a settlement agreement on a safety issue."

A citizens advocacy group that has urged greater federal scrutiny of safety conditions on the project issued a strong statement criticizing the settlement. "Instead of taking a stand that would protect the safety of men and women working on federally funded projects, the government has chosen to side with a company that has been involved in no less than 67 OSHA violations and a federal criminal indictment by the U.S. Department of Justice," said Joseph A. Kinney, executive director or the Chicago-based National Workplace Institute.

Prefers Debarring Firm

"The message this agreement sends is clear: Companies can violate federal safety laws and expect to have a second chance," Kinney said. He said that the record clearly warranted suspending or debarring Kenny now and said he feared that other companies who had violated safety laws would use "this unfortunate and ill-advised agreement as a precedent to escape responsibility for actions that violate federal laws or regulations. It would have been a heck of a lot more effective to debar them."

Grand said EPA felt the settlement would have just the opposite effect. "It sets a standard in terms of an action we might take in terms of any company that fails to adhere to basic safety standards. That sends a message to the (construction) industry."

Gene Callahan, an attorney for Kenny, stressed that the agreement was not an admission of any wrongdoing and said the company was contesting both the criminal charges and the $17,600 civil fine OSHA levied against the company.

A number of civil suits also have been filed because of deaths and injuries on the project. Thus far, insurance companies have paid out more than $7 million to settle those cases. Smith's civil wrongful death case is still pending.